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financial markets and institutions notes
☁ extra readings
🏐 mcqs i got wrong
topic 1: the financial system
the evolution of the financial system
the economy has evolved through three stages
the barter economy
the monetary economy
the financial economy (with a financial system)
the barter economy
money does not exit at the beginning of economy
barter is the simplest form of the economy. people exchange their products directly
a barter economy builds on the double coincidence of wants
the common medium of exchange emerge from the barter economy: money
a brief history of money.
money took many forms
desirable properties of a common medium of exchange:
valuable
relatively scarce
homogenous
financial markets and institutions notes 1
, divisible
easy to carry
Investment/consumption are not always synchronised with earnings.
Firms cannot invest more than what they currently earn.
Households cannot consume more than what they currently earn.
Some households/firms are in surplus and some in deficits.
Firms/households issue financial claims to raise funds and some provide funds out of savings
financial markets and institutions notes 2
, the roles of a financial system
what is a financial system?
a financial system is the collection of financial markets and financial intermediaries that facilitate
the issuance and transaction of the financial claims
what are the roles of a financial system?
two main roles:
It is an intermediary between those economic agents in surplus and those agents in deficit.
A well functioning financial system channels funds efficiently to the agents of the highest
productivity.
It is also a payment mechanism, eg -
Cheques.
Debt cards; credit cards.
Online payment platforms.
Apple pay; WeChat pay.
BACS(Bankers’ Automated Clearing Services).
CHAPS(Clearing House Automated Payments System).
The letter of credit (LC).
the participants of the financial system include -
The ultimate lenders and ultimate borrowers.
Individuals and organisations who need certain financial services (e.g., insurance, tax service,
investment, mortgage).
Financial intermediaries (e.g., VC firms, pension funds, banks).
Financial market organisers (e.g., the LSE)
financial markets and institutions notes 3
, Regulators (e.g., the FCA, PRA, BoE)
global financial centres
well known financial centres include
london, new york, hong kong, singapore, shanghai, frankfurt, tokyo…
financial firms and professional traders tend to cluster in a few major centres
The attributes of a financial centre
People: availability of skilled people, business education, active labor market.
Infrastructure: IT support, office spaces (after covid-19?), transportation.
Business environment:
Arguably the most important factor.
Includes law, regulation, tax, economic freedom, government support, and the ease of doing
business.
Transparency.
Fair and just business environment.
Market access: access to national and international financial markets; clustering of financial-
service firms.
General competitiveness: a good place to live, education, health care, safety, air quality, etc.
Topic 2: financial claims
what is a financial claim?
A financial claim is a claim to the ownership of a series of future cash flow.
A financial claim is also called a financial asset, security, or instrument.
The opposite is a financial liability , i.e., the obligation to pay the future cash flows.
In the examples below, who hold the financial claims? Who hold the financial liabilities?
Bank loans.
UK government bonds (gilts). (owned by commercial bank that buys the bond)
Company stocks/shares.
Total financial assets=total financial liabilities (in a closed economy)
financial markets and institutions notes 4
financial markets and institutions notes
☁ extra readings
🏐 mcqs i got wrong
topic 1: the financial system
the evolution of the financial system
the economy has evolved through three stages
the barter economy
the monetary economy
the financial economy (with a financial system)
the barter economy
money does not exit at the beginning of economy
barter is the simplest form of the economy. people exchange their products directly
a barter economy builds on the double coincidence of wants
the common medium of exchange emerge from the barter economy: money
a brief history of money.
money took many forms
desirable properties of a common medium of exchange:
valuable
relatively scarce
homogenous
financial markets and institutions notes 1
, divisible
easy to carry
Investment/consumption are not always synchronised with earnings.
Firms cannot invest more than what they currently earn.
Households cannot consume more than what they currently earn.
Some households/firms are in surplus and some in deficits.
Firms/households issue financial claims to raise funds and some provide funds out of savings
financial markets and institutions notes 2
, the roles of a financial system
what is a financial system?
a financial system is the collection of financial markets and financial intermediaries that facilitate
the issuance and transaction of the financial claims
what are the roles of a financial system?
two main roles:
It is an intermediary between those economic agents in surplus and those agents in deficit.
A well functioning financial system channels funds efficiently to the agents of the highest
productivity.
It is also a payment mechanism, eg -
Cheques.
Debt cards; credit cards.
Online payment platforms.
Apple pay; WeChat pay.
BACS(Bankers’ Automated Clearing Services).
CHAPS(Clearing House Automated Payments System).
The letter of credit (LC).
the participants of the financial system include -
The ultimate lenders and ultimate borrowers.
Individuals and organisations who need certain financial services (e.g., insurance, tax service,
investment, mortgage).
Financial intermediaries (e.g., VC firms, pension funds, banks).
Financial market organisers (e.g., the LSE)
financial markets and institutions notes 3
, Regulators (e.g., the FCA, PRA, BoE)
global financial centres
well known financial centres include
london, new york, hong kong, singapore, shanghai, frankfurt, tokyo…
financial firms and professional traders tend to cluster in a few major centres
The attributes of a financial centre
People: availability of skilled people, business education, active labor market.
Infrastructure: IT support, office spaces (after covid-19?), transportation.
Business environment:
Arguably the most important factor.
Includes law, regulation, tax, economic freedom, government support, and the ease of doing
business.
Transparency.
Fair and just business environment.
Market access: access to national and international financial markets; clustering of financial-
service firms.
General competitiveness: a good place to live, education, health care, safety, air quality, etc.
Topic 2: financial claims
what is a financial claim?
A financial claim is a claim to the ownership of a series of future cash flow.
A financial claim is also called a financial asset, security, or instrument.
The opposite is a financial liability , i.e., the obligation to pay the future cash flows.
In the examples below, who hold the financial claims? Who hold the financial liabilities?
Bank loans.
UK government bonds (gilts). (owned by commercial bank that buys the bond)
Company stocks/shares.
Total financial assets=total financial liabilities (in a closed economy)
financial markets and institutions notes 4
